Strategic Default: What Is It and Can It Help Me?

Strategic default can be useful to relieve yourself of the burdens of a mortgage while minimizing
the negative consequences. Let’s say that the home you purchased
turned out not to be such a sound investment—it may be time to walk
away from it. While many people think of this as strategy homeowners take
to stop making payments when they cannot afford to make them, the benefits
can outweigh the negatives.

How does strategic default work?

Let’s take the most common example as to why some may choose strategic
default. Usually, when you owe much more than what your home is worth,
ceasing payments is much more worthwhile than continually paying down
on the home. When this happens, the mortgage loan company will have no
choice but to begin
foreclosure.

There are some of the advantages of strategic default:

Can reduce the amount of debt you carry

The money saved can be used to fund other investments

You are no longer responsible for the payment of your loan

You can give up payments on properties that hold no value

Strategic default also encompasses cases where it becomes a practical decision,
which was carefully planned from a purely business perspective. Some choose
this route even if they can afford to make payments. It all comes down
to what works best in the long-run, and a bad investment is a bad investment,
no matter how you cut it. That is when it is best to cut the losses as
quickly as possible.

What are the downsides?

There is looming fear, though, for many that strategic default can ruin
one’s credit. Similar to other forms of debt relief, such as
bankruptcy, your credit score can take a dip, but if you had a score that was strong
to begin with, the drop is slight—perhaps about 150 points, give
or take. You may find some difficulty applying for another loan in the
next several years.

Other downsides one could face may mean that you have difficulty renting
an apartment or a condominium. Landlords may consider this when deciding
whether or not someone is a desirable tenant. In a similar way, some employers
may also run a credit check and use that to make a hiring decision. This
may not be the case for you, but should be something to keep in mind in
the future.

Have additional questions? Contact us!

Your financial situation will be different from others’. You can
turn to our Chicago bankruptcy lawyers for counsel. We are here to point
you in the right direction and find a debt solution that is tailor-made
and specific to your needs.

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